GCR Ratings (“GCR”) has affirmed Emzor Pharmaceutical Industries Limited’s national scale long-term and short-term Issuer ratings of A-_(NG) and A2_(NG) respectively. Concurrently, GCR has affirmed the national scale long-term Issue rating of A-_(NG) accorded to Emzor Pharma Funding SPV Plc’s N13.729bn Series 1 Senior unsecured Bonds. The Outlook on the ratings is Stable.

Rating Rationale

The ratings affirmation of Emzor Pharmaceutical Industries Limited {(“Emzor”), referring to the parent company and Zolon Healthcare Limited (together, “the Group”)} balances its strong competitive position as a leading manufacturer in the Nigerian pharmaceutical industry against the relatively high debt and persistent working capital pressure, which have weakened the leverage metrics.

Emzor maintains a leading position in the Nigerian pharmaceutical manufacturing sector, with over 200 products in over 16 categories including well-established brands. Its position is further strengthened by the wide distribution network and ongoing product innovation. In addition, its established relationship with international suppliers guarantees stable sourcing of raw materials and consumables while relationships with global technical partners have enabled access to advanced technologies and processes. The Group plans to complete the first local production plant for active pharmaceutical ingredients (“APIs”) for anti-malarial drugs before end-June 2023. This should reduce reliance on imported APIs and the attendant foreign currency pressure, and further entrench Emzor’s dominance in the local industry.

Earnings remain a positive rating factor, underpinned by the sound revenue progression over the review period, despite the pervasive macro-economic headwinds. This is driven by a combination of higher traded volumes and increased selling prices. Nonetheless, operating costs have risen significantly in recent periods due to the spike in energy prices and the continuous Naira devaluation. Emzor has not been able to fully pass on the additional cost to customers, resulting in the EBITDA margin narrowing to 16.2% in FY21 from 20.3% in FY20. As of June 2022 (“1H FY22”), the margin improved slightly to 17.2%, supported by cost-saving measures and the contributions from new higher-margin products. Over the medium term, GCR anticipates revenue growth to hover around 23%, with further margin enhancement as the Group benefits from the backward integration initiatives in API production and expanding product portfolio with the attendant economies of scale.

The ratings are constrained by Emzor’s weak leverage and capital structure due to elevated debt and high working capital pressure. Gross debt registered at N24.1bn (including a shareholder loan of N5bn) at end 1H 2022, from N12.1bn at FY20, due to the persistent working capital absorptions and the capital expansion funding requirements. Accordingly, net debt to EBITDA deteriorated to 4.3x at FY21 (FY20: 1.7x), before improving to 3.9x at 1H FY22 following part settlement of debt and the higher EBITDA. Excluding the shareholder loan, net debt to EBITDA would improve to 3.5x at FY21 and 3.0x at 1H FY22. Operating cash flow coverage of debt has been constrained below 5% over the review period and interest coverage remained weak at 1.8x in FY21 (FY20: 3.4x). Although the shareholder loan is expected to be fully converted to equity by end-December 2022, gross debt should remain high over the medium term as Emzor is at an advanced stage of securing additional facilities to further expand its production capacity. This notwithstanding, GCR expects net debt to EBITDA to register at 2.4x in FY22 and improve further to 2x in FY23 on the back of improvement in earnings. Conversely, OCF to debt will likely remain weak over the outlook period as working capital pressures persist in line with business growth.

Emzor’s liquidity assessment is underpinned by its moderate cash holdings of about N2bn as at 30 June 2022, undrawn committed facilities of N2.3bn, and a moderate cashflow of N1.8bn. This is sufficient to cover short-term debt of N1.8bn and finance working capital and expansion requirements. The additional capacity expansion plan in FY23 is expected to be financed by the anticipated new debt. GCR believes that Emzor has the flexibility to bolster liquidity by withholding discretionary capex spend. In addition, GCR positively considers the Group’s strong relationships with financial institutions and the debt capital market, which has allowed for steady access to funding on favourable terms. Overall, Emzor’s uses vs. sources liquidity coverage is estimated at 1.5x over the 18-month period to December 2023.

In January 2021, Emzor, through its special purpose vehicle Emzor Pharma Funding SPV Plc (“the Issuer”), raised an initial N13.729bn in Series 1 Bond under its N50bn Bond Issuance Programme, with an interest rate of 10% and maturity in 2026. The Series 1 Bonds are direct, unconditional, senior, unsubordinated, and unsecured obligations of the Issuer and shall at all times rank pari passu and without any preference among themselves. The principal will be fully redeemed at the maturity date through a bullet payment, but interest is payable semi-annually. Given that Emzor offers timely and full coverage of all payments due to the Bondholders, under Series 1 Senior Unsecured Bonds through the Deed of Covenant, the Bonds bear the same default risk as Emzor and would reflect similar recovery prospects to senior unsecured creditors in the event of a default. As such, the long-term Issue rating for the Series 1 Bonds is equivalent to Emzor’s long term senior unsecured corporate rating.

Outlook Statement

The Stable Outlook reflects GCR’s assessment that Emzor’s well-established brands will continue to support strong growth trajectory, which would underpin the Group’s relatively strong credit profile through the expansionary capex phase.

Rating Triggers

An upward rating movement could be supported by meaningful growth in earnings trajectory. This is hinged on timeous and successful completion of the various expansion projects. Furthermore, operating cost control and good working capital oversight, as well as maintaining a relatively strong leverage and liquidity profile through the expansion phase would be positively viewed.

A rating downgrade could arise from an underperformance in earnings against a significant rise in debt, which weakens the leverage metrics. Material cost overruns with severe working capital pressure, could also negatively impact group performance.

Ratings History

Emzor Pharmaceutical Industries Limited

Risk Score Summary

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to Emzor Pharmaceutical Industries Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

Emzor Pharmaceutical Industries Limited in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Emzor Pharmaceutical Industries Limited and other reliable third parties to accord the credit ratings included:

• 2021 audited annual financial statement, and prior four years annual financial statements;
• Six-month management accounts to 30 June 2022;
• Internal and/or external management reports;
• Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties;
• Information specific to the rated entity and/or industry was also received;